Protecting a Portfolio Against Downside Moves

Sometimes in a long bull market trend, like what we’ve been experiencing, it is easy to overlook protecting options trades and stock portfolios against downside moves.

It is easy to get complacent whenever you see the market shake off any negative news and maybe only with a pause it goes back up, but eventually the market will have a correction.

Protective Measures

Of course one of the best ways to protect yourself is to have some protective measures on ahead of time so that you are not  scrambling to protect yourself once the move is in play. In my mind one of the best ways to do this is to consider purchasing long verticals or long calls in the VIX options two to three months out in time.

Considering VIX options currently in late May or early June  would be attractive. What I like to do is  wait for a day whenever the VIX pulls back a bit and then look at buying options at  2 to 3 points out of the money and  a few more points out of the money.

For example if the VIX is at 11, you may want to consider buying 13 call options and also calls at maybe 17 or 18. I think that those are all attractive levels to look at to protect yourself.

VIX Moves Fast

You will see that the VIX moves very quickly whenever the market makes down moves and often you have many chances to be profitable in these options on the market pullback, particularly a quick one, and you can do this by either purchasing long calls or long call verticals, your choice.

Of course long call verticals can lower the cost of the trade but with slightly more brokerage fees.

When you do strategies on option plays  such as butterflies or calendars, you can also consider buying an out of the money put below a position to protect yourself  if the market makes a quick pullback.

Opportunities

Once the down move is underway look for an opportunity for a slight pause or  pullback in the VIX to make your entry. You can still protect yourself even on some slight spikes, and this was just a few of the ways you can give yourself some peace of mind against the coming downtrend or a quick bearish market moves.

We at Sheridan Options Mentoring are prepared to help with this and further developing your options trading business.

Mark Fenton

mark@sheridanmentoring.com